Conceptualising and Locating the Social Failure of Islamic Finance: Aspirations of Islamic Moral Economy vs. the Realities of Islamic Finance

Abstract

Islamic moral economy emerged in the modern sense in the late 1960s and early 1970s as an attempt to develop an authentic understanding of the Islamic system of economics and develop policies accordingly. As part of this concept, Islamic banks and fi nancial institutions are considered as the institutional aspects of this moral economy, which can pool their resources together to fi nance real economy activity. However, the transformation of Islamic banking into a commercial banking form since mid-1975 has resulted in unprecentedly successful fi nancial performance, which, however, has been at the expense of the ‘social and economic developmentalist’ aspirations of Islamic moral economy. Therefore Islamic banks and fi nancial institutions are criticised for their social failure. This paper, therefore, aims to explore the social failure of Islamic banks and fi nancial institutions and locate the sources of this failure. In moderating the social failure of Islamic banks and fi nancial institutions, this paper suggests that a third institutional development in the form of non-banking fi nancial institutions, such as Islamic social banking, Islamic microfi nance, an awqaf system, ar-rahn or Islamic pawnbroking, and zakah funds should be created with the objective of serving the social and developmental needs of Muslim societies.